Association of Investment Companies demands suspension of ‘actively misleading’ key information documents and urges Treasury to launch enquiry into the issue.
The Association of Investment Companies (AIC) has called for the suspension of ‘actively misleading’ key information documents (KIDs) and urged the Treasury to launch an enquiry into the issue.
The calls follow the AIC’s latest research which it said ‘demonstrates conclusively’ that KIDs are systematically flawed as they rely on past performance as a basis for future projections.
The AIC once again urged watchdog, the Financial Conduct Authority (FCA), to ‘act swiftly’ to protect consumers and warn them not to rely on KIDs to make investment decisions in response to the regulator’s request for help on the controversial documents.
It then called for the Treasury Select Committee to launch an enquiry into KIDs given the failure policymakers and regulators to take action.
AIC chief executive Ian Sayers said regulators should be ‘held accountable’ if they continue to delay moves to protect investors.
The trade body has previously refused to publish the ‘utterly misleading’ KIDs on its website, with Sayers saying he heard people dismiss KIDs as ‘not worth the paper they are printed on.’
The latest report, ‘Burn before reading’, refers to the comments of Scottish Mortgage non-executive director John Kay that investors should ‘burn’ KIDs rather than read them.
In the report, the AIC argued that estimated performance figures were ‘wildly optimistic’ due to recent market movements.
It found for around a tenth (11%) of investment company KIDs indicated that, in ‘moderate’ market conditions, investors might expect annual returns of more than 20% over the recommended holding period.
Half (51%) of KIDs, meanwhile implied annual returns between 0% and 10% in ‘unfavourable markets'. Another tenth (11%) estimated annual returns of between 10% and 20% in unfavourable markets.
To demonstrate this issue, the research modelled 22 moderate performance scenarios, comparing this with the actual return an investor would have received had they held the investment for five years.
For half of these periods – 11 out of 22 – the KID indicated the opposite, an investment gain, of the actual outcome, a loss. The AIC said such misleading scenarios, unbeknown to investors, could encourage them to buy high and sell low.
The trade body reiterated the point it had previously made that risk indicators, on scale from one (low risk) to seven (high risk), looked identical to those of open-ended funds and therefore misled investors into thinking they were lower risk.
It found a third of investment companies were given a risk level of three but just one in seven (15%) had KIDs indicating that investors might receive returns of between 10% and 20% per year in ‘unfavourable’ market conditions over the recommended holding period.
Sayers warned that it would be less experienced investors who would suffer the most, as the more experienced simply ignored the ‘actively misleading’ documents.
‘Telling investors that they can have high returns at medium-low risk in unfavourable markets is particularly toxic and entirely divorced from reality,’ he said.
‘The rules should be suspended now so these fundamental flaws can be addressed,' Sayers argued. 'Regulators should warn consumers who have already received these documents not to rely on them when making investment decisions.’
He added that the Treasury should look into the issue so consumers would ‘get the protection they deserve’.